Key data rele|ased in the US last week included the upward revision of 2Q24 GDP growth to 3.0% QoQ SAAR, the lower-than-expected core PCE inflation in August and figures confirming the resilience of consumption. This reflects that, while the US economy remains in a slowdown, the FOMC acted pre-emptively, without signalling an imminent recession, thus supporting the continued steepening of the yield curve. The 2/10Y slope reached new two-year highs (22bp) and the 2/10Y neared 0, while the SOFR curve is pricing in a -75bp adjustment in the policy rate by year-end.
As markets continue to factor in a more dovish Fed, the environment has been one of risk appetite, leading to a broad USD depreciation and a rally in US equities and most emerging markets. This week, the most relevant data will be September’s employment report on Friday. In general, the labour market is expected to continue showing weakness with no more than 130K jobs created and an unemployment rate of 4.2%, thus triggering the SAHM rule to levels consistent with a recession, although with distortions derived from migration and a higher participation rate. In case of a lower-than-expected reading, rates should continue posting gains. While for risky assets, any potential rally could be relatively limited as the risks of a recession would weigh rather negatively.
Last week, the local calendar included September’s bi-weekly inflation, July activity data, and Banco de México’s rate cut (see the full document). However, since Banxico kept to the gradual cycle it had signalled, the 25bp cut was widely expected and already priced in. Although the steepening was more pronounced locally compared with the US, the long and belly segments of the curve have moved up by as much as 16bp in the 10Y and 20Y sections, while the short end showed a slight rally. The 2/5Y and 2/10Y slopes approached 0 for the first time since 2022. We still see room for further gains in both nominal and real curves, particularly given the CB’s forward guidance. We continue to see value in the 3-7Y tenors, though we also find the short end appealing. As we noted in our recent notes, we see value in directional steepeners. On the local front, this week’s data flow is light (see the document), but markets will be attentive to the new president’s messages regarding her priorities and her views on the economy and Pemex.
Lastly, the MXN has appreciated in recent weeks against the USD, in line with most emerging market currencies. Since the carry remains elevated, all things considered, the MXN could remain relatively stable in the near term. However, the outlook is still complex (pending reforms, the budget proposal, and most importantly, the US elections), and we continue to see room for the MXN to reach levels above 20.0 against the USD around said risk-off events.